David Cummings on Startups

Author: David Cummings

  • Where’s the Value Created

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    A few weeks ago I mentioned something similar but I think it is important to understand that value in a startup and established companies isn’t always obvious. There are many different ways to create value and the public perception of how money is made by a certain company can often be good to obfuscate the real value being created. Let’s look at a few examples:

    • Someone once told me the market capitalization of airlines is equal to their frequent flier points. Meaning, one significant way airlines make money is by selling frequent flier miles to other companies like credit card issuers.
    • There’s an Internet company that recently received a good deal of bad press about their selling social media data. One of the strongest ways they make money is by acting as a credit score of sorts for email addresses, even though you’d never know from their main website.
    • In Atlanta there are several retail store fronts in expensive areas for a company that helps people find apartments. Of course, they pitch the service as free and make money by referral fees from the apartments. This one is a bit more obvious but it shows that there are non-obvious ways to build a business.

    What else? What are some other examples of non-obvious ways companies create value?

  • Explain What Your Startup Isn’t

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    Startup founders love to explain their vision, strategy, and rattle off all the product features. I’m a fan of offline analogies as well as creating mindshare hooks. Startups also fall prey trying to be all things to all people, but with such little resources it is best to do one thing and do it extremely well. One of the things I’d like to see more founders do is think through what their startup isn’t. Here are some examples:

    • We don’t target companies with more than 300 employees
    • We don’t target B2C companies
    • We don’t sell with field sales reps

    Yes, the opposite could be articulated but it’s easy to say “we focus on B2B companies” while also seeking out B2C companies. The key with explaining what the startup isn’t is that it makes it more clear where you stand, helping enrich your core focus.

    My recommendation is to make a list of what your startup isn’t.

    What else? What are some other benefits of explaining what your startup isn’t?

  • 9 out of 10 Entrepreneurs Have a Sales Challenge

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    One of the things I enjoy doing is talking to entrepreneurs about their business. I’ve talked to hundreds of entrepreneurs over the years and 30+ entrepreneurs just last month. My conclusion recently is that nine out of 10 entrepreneurs have a sales challenge. By sales challenge I mean that increasing sales is their number one goal, focus, and priority. Unfortunately, for many of them, they aren’t making the desired progress.

    Here are the recurring themes I see:

    • Not enough time to devote to sales, but they are the only person selling
    • Don’t like to sell and the recently hired sales rep isn’t working out
    • Trying to sell over the web (e.g. self-service) with no luck
    • Wanting recurring revenue but still doing one-off projects
    • Performing sales-like activities with co-founders but deals aren’t materializing

    Now, I don’t have a silver bullet solution to these challenges. My recommendation for entrepreneurs is to think through customer acquisition as one of the most core aspects of their business and realize it is going to be the hardest.

  • The Unacknowledged Legacy of MSA on Atlanta

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    Management Science America (MSA) was the largest software company in the world a few decades ago and headquartered right here in Atlanta. It’s legacy profoundly impacted the Atlanta technology community through alumni of the company that started some of the most successful startups, invested millions of dollars as angels and VCs, and helped in the management and executive ranks of numerous companies.

    The impact of MSA on Atlanta has been well documented but there’s an area that is rarely talked about: the MSA legacy of a hyper sales-focused culture. In my experience, B2B software companies that are the most successful are ones with excellent engineering and amazing sales teams. If you look at some of the billion dollar Atlanta successes that had MSA-alumni involved, like Internet Security Systems and Witness Systems, as well as current success stories like Vocalocity that are well on their way to being a big company, they all had sales as a main strength.

    My recommendation is to focus on building a sales-centered culture and the next time MSA is brought up in a conversation, acknowledge that their sales-focused culture was a major driver of success.

  • #1 Thing the VC Industry Can Do To Save Itself (but can’t)

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    The VC industry is great catalyst of job and GDP growth in the U.S. Only, it has a major problem on its hands: it is going to shrink considerably over the next few years. The challenge is that investors like pension funds, college endowments, and wealthy families allocate a certain percentage of their money to the VC industry (e.g. 3%).

    Now 3% of investments in 2008, before the stock market, real estate, and other categories crashed was a larger number than 3% of investments today. Unlike publicly traded equities, VC investments are very illiquid so what was 3% in 2008, with portfolios lower overall, might represent 5% of the portfolio today. Thousands of investors needs to shrink their VC allocation down from 5% to 3%, and that’s going to result in many VCs going out of business.

    Here’s the number one thing the VC industry would like to do to save itself:

    The VC industry should make an across-the-board cut of 30% to all internal company valuations.

    Internal company valuations are required to report back to the investors but in reality represent a guess at the company value since the companies are private and the valuation is but a range. After cutting the valuations internally and reporting the new values back to the investors (that’s not a tenable conversation or legal) the investors’ portfolio allocation would back inline.

    Since the portfolio allocation would be back inline investors can put new dollars into VC as the rest of the portfolio grows. As it stands now with a significant overallocation to VC, investors are going to allocate even fewer new dollars (or none!) to VC for a period of time until the existing dollars plus new dollars equals the desired percentage of the portfolio.

    This strategy won’t happen but would be the number one thing the VC industry as a collective could do to save most of the size of the industry.

    What else? What do think of this idea on how the VC industry could help itself?

  • A Startup is More Valuable on Day 1 than Day 100

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    There’s an interesting phenomenon that takes places with startups looking to raise money: the startup is more valuable on day one than on day 100. Naturally, you’d think that working over three months on a business would make it more valuable, but for startups with no operating history a clean slate makes it easier to paint a big picture on this new, valuable business. You see, after 100 days, the entrepreneur should have launched the product or service in a minimum viable manner, have prospects and (hopefully) customers, and be well on his/her way to making money.

    The strange disconnect occurs when the company starts generating revenue and has paying customers. Now, with real numbers, an investor can start doing projections and come up with a model for how the company will grow and be valued. Almost always this results in a company valuation which is less than the pie-in-the-sky value assigned to the business on day one.

    So, if you’re raising money, and have a track record (required to raise money in Atlanta for an idea-stage startup), think hard about how the value of the business is likely to be higher at the beginning when you don’t have real-world data.

  • Startup Progression Example Two

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    Yesterday I also had a chance to meet with another new startup in town. This startup took a very different path from the other startup I met with as it is a spin-out from a large, established company. Here are some of the details:

    • The founders have worked together for two years at a publicly traded company in town
    • The CTO was the CTO of the company the publicly traded company had acquired at a strategic valuation
    • They spun out with a handful of high profile clients as well as four employees (inclusive of the founders)
    • They are in a fast-growing industry that has a lack of market awareness
    • The team has an excellent technical background but doesn’t have experience building a sales and marketing machine

    This is a team that will have an easy time raising money locally if they choose to do so. I’m looking forward to watching their progress.

  • The Startup Progression

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    This afternoon I met with a local startup founded by two recent UGA grads. Impressively, they’ve had a great startup progression so far. Here’s what they told me:

    • Spent three months working on a business plan only to realize it was a waste of time
    • Spent the last three months building a fully functioning web app
    • Didn’t know web design so they taught themselves PhotoShop, HTML, and CSS
    • Hired a local programmer to build a working site with PHP and MySQL
    • Raising a small seed round to launch their sales and marketing

    There were a few items I didn’t agree with:

    • Going to roll out the product to their main market and then focus on several related markets (I think they should stay laser focused on their initial market until the business is profitable)
    • Going to invest in 10-30 hours of programming per month (I think they need to innovate faster than that)
    • Don’t have a programmer as a co-founder (a technical co-founder is critical)

    My recommendation is to launch early and often (within 60-90 days of start) and solicit feedback from the market. These guys are well on their way.

  • Proprietary Customer Acquisition Strategies

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    One of my favorite questions to ask startups is “How are you going to generate leads?” Inevitably the answer comes back along the lines of SEO, SEM, blogs, social media, etc. The major challenge, naturally, is that’s everyone else’s strategy as well. Oh, and the well financed and/or established companies have significantly more money to spend, especially when it comes to PPC ads.

    I get most excited when a company has a proprietary customer acquisition strategy. Here are a few examples:

    • Exclusive relationship to co-market their product with a complementary solution that already has great distribution
    • Exclusive relationship with one or more lead generation sites that specialize in their industry (one company in town has done a great job with this approach)
    • Proprietary method of generating prospect lists based on non-generally available data

    Customer acquisition is hard and fiercely competitive. My recommendation is to think through proprietary customer acquisition strategies as a pre-requisite to starting a business.

    What else? What are some other example proprietary customer acquisition strategies?

  • How Much is Enough: A Story from Jimmy John’s

    Two weeks ago I was at Jimmy John’s in Buckhead near my house and there was a sign on the wall with a parable (see photo I took from iPhone to the right). Here is the story titled How Much is Enough:

    The American investment banker was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked. Inside the small boat were several large fin tuna. The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.

    The Mexican replied, “only a little while.”

    The American then asked why he didn’t stay out longer and catch more fish?

    The Mexican said he had enough to support his family’s immediate needs.

    The American then asked, “but what do you do with the rest of your time?”

    The Mexican fisherman said, “I sleep late, fish a little, play with my children, take siesta with my wife, Maria, stroll into the village each evening where I sip wine and play guitar with my amigos, I have a full and busy life.”

    The American scoffed, “I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat, and with the proceeds from the bigger boat you could buy several boats. Eventually, you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually NYC where you will run your expanding enterprise.”

    The Mexican fisherman asked, “But, how long will this take?”

    To which the American replied, “15-20 years.”

    “But what then?”

    The American laughed and said that’s the best part. “When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions.”

    “Millions?” asked the fisherman, “Then what?”

    The American said, “Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evening, sip wine and play your guitar with your amigos!”

    (Author Unknown)